The Federal Energy Regulatory Commission (FERC) has released what could be its final set of rules designed to fix the remaining flaws in the United States electricity market, remove discriminatory practices on the transmission system and, as FERC says, "give the nation the benefits of a truly competitive bulk power system." Removing trading barriers to wind power development and ensuring wind energy equal and fair access to the US transmission grid is part of the proposed rules for a Standard Market Design (SMD). The SMD is now out for comment through mid-October.
The FERC proposal removes the primary transmission obstacle for wind power by largely adopting a ruling it made in late March. This approved a California Independent System Operator (CalISO) proposal to remove "imbalance penalties" from intermittent resources, such as wind generators, who fail to deliver power as scheduled (Windpower Monthly, May 2002). The CalISO plan also proposed to schedule wind resources on the transmission system using a wind energy forecasting model and to average imbalances over a month, as does the SMD.
State and national wind industry advocates had urged the CalISO to file the proposal and then urged FERC to adopt it when developing its SMD. Jim Caldwell, the American Wind Energy Association's policy director, calls FERC's proposal encouraging. "The key to the importance of SMD is that it levels the playing field between new and existing resources and between wind and conventional technologies by making the use of the transmission system market-based and allowing participants to financially settle real-time energy delivery in a liquid spot market, rather than requiring precise advance delivery schedules as in the current system," Caldwell says.
In addition to fair access to the grid, FERC says the SMD also gets at the "most persistent and costly" problems of the nation's power market. Those are a decade of under investing in transmission infrastructure, siting generation too far away from markets, discriminatory behaviour against independent generators and design flaws in "certain" existing markets. To some degree, says the commission, all of these problems have contributed to the congestion found in areas of all transmission grid systems across the US.
The SMD deals with this congestion by proposing a market-based plan for allocating transmission rights. Called locational marginal pricing, this approach allocates transmission capacity through congested paths for those who value it the most using a bidding system, then allows those rights to be traded on a secondary market. Wind is often located at the end of a transmission system and far from load centres, with a congested path between the resource and the nearest customer. In that situation, buyers of day-ahead and real-time transmission capacity could initially consider wind a lower value resource, but FERC says that locational marginal pricing will encourage investment in transmission and generation infrastructure, which will soon fix the problem.
"One of the key things that has been overlooked is that the infrastructure has not been built out to support all the transactions," says John Howe, vice-president for electric industry affairs at American Superconductor. Howe has been following FERC's development of the SMD for over a year. "Building and strengthening the transmission system is essential for wind to play a more important role in the market." He adds that with locational marginal pricing, FERC is trying to create the right framework of price signals to get this done.
FERC says there is an absence of clear rules that govern the wholesale power industry and it is this, among other reasons, which is "preventing markets from realising their full potential." FERC's SMD proposal, which fills more than 600 pages, attempts to fill that vacuum with regulations designed to create more competition and efficiencies, reduce demand, mitigate market manipulation and encourage further infrastructure investments.
"Our goal is to promote economic efficiency in electricity for the benefit of all Americans," says FERC chairman Pat Wood, III. "We want solid infrastructure, just and reasonable rates, and balanced market rules so investors and competitors see some stability and opportunity in all aspects of the bulk power business. These clear rules and vigilant oversight under a uniform system will replace the obsolete patchwork that we have today."
In at least one state, California, this new control by FERC over the transmission and power markets should be a relief to ratepayers and utilities who endured rolling blackouts and price spikes during power crunches in 2000 and 2001. One of the flaws of the California design, says Howe, is that the CalISO operates only in a real-time market and that market was subject to the market manipulations that resulted in high wholesale prices.
As a result of the strain that put on California utilities, some renewable resource generators went unpaid for power produced during those times for over a year. To avoid such manipulations, the SMD also envisions a day-ahead market and encourages ISOs and regional transmission organisations to enter into long term contracts. The bottom line is that California will have to alter its open access experiment to conform to the SMD.
Standard Market Design is the third book of a trilogy, says FERC, the final push to bring about a truly competitive market structure. In 1996, FERC released Order 888, which opened access to the nation's transmission system. But according to FERC Commissioner William L Massey, that did "not fully eliminate the self dealing incentive inherent in vertical integration. A number of formal and informal complaints alleged that access to the grid continued to be fraught with discrimination."
In response, FERC released its Order 2000 calling on areas of the country to develop regional transmission organisations (RTO) to ensure independent grid management. While California, Texas and some areas of the East Coast completed a transition to these independent transmission operators, for the most part RTO formation is still in progress. Under the SMD, transmission is to be operated by an independent entity even if it turns out not to be an RTO.